NSE introduces stricter norms for SME listing; additional requirement explained with example

IPO News, Share Market News: Stock exchange NSE on Thursday introduced stricter norms for the listing of small and medium-sized enterprises (SMEs). 

In a circular, the bourse said that SMEs looking to list their securities on NSE EMERGE - its SME platform - will now be required to fulfill certain additional requirements.  

"The company/entity should have positive Free cash flow to Equity (FCFE) for at least 2 out of 3 financial years preceding the application," NSE said. 

This requirement will be in addition to the existing criteria.

The additional requirement will apply to all draft red herring prospectuses (DRHPs) filed on or after September 1, 2024, according to NSE. 

"All other criteria remain unchanged. This shall be applicable till further orders," NSE wrote. 

NSE detailed the methodology for computing free cash flow to equity (FCFE) as follows:

FCFE = Cash flow from Operations – Purchase of Fixed Assets + Net Borrowings - Interest x (1-T)

• Cash flow from operations will be determined as: 

Cash Generated from Operating Activities – Income Tax paid (if any) i.e. Net Cash flow from Operating Activities

• Purchase of Fixed Assets will be determined as:

Purchase of Property, plant, and equipment (PPE) (including Capital Work in
Progress (CWIP)) – Sale proceeds of PPE, CWIP (if any) + Capital Advances (if any)

• Net Borrowings will be determined as:

Proceeds from Long-Term Borrowings - Repayments of Long-Term Borrowings + Proceeds from Short-Term Borrowings - Repayments of Short-term Borrowings

• Interest x (1-T) will be determined as:

Interest Expense on Total (ie. Long term as well as short term) borrowings x (1 – T#)

• #T being Effective Tax Rate for the company: 

Effective Tax Rate calculated as [1-(PAT/PBT)]

"All the figures and numbers will be taken from audited balance sheets (filed with offer documents) only," it added. 

The exchange also shared an example to explain the methodology: 

What is NSE EMERGE?

NSE's SME platform, EMERGE enables emerging businesses to raise equity capital from a diversified set of investors, including institutional investors and high net worth individuals (HNIs).

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